Tuesday, 07 February 2012 01:20

Risk Factors Threaten Apple Margins: Losing Its Cool, Losing The Tech Race, Losing The Legal Battles, Losing The Price Wars Featured

This is a follow-up post to the Anecdotal Observations On Apple's Recent Quarter article written last week. Those that didn't read it, particularly those who manage institutional moneys should definitely take the time to peruse it before moving foraward. It clearly outlines the "one-time" event status of Apple's blowout quarter just past. This piece goes further to describe how that quarter's performance masks the trends that I have been highlighting for some time now. I will address market trends, network effects and margins later, but upfront let me pose the taboo question... What if Apple lost its cool factor? You see, that's the problem with fads, the followers are simply too finicky. This is screen shot of the recent viral Samsung Galaxy S2 phone.

Samsung_s2_ad

The commercial shows in its entirety belw. Despite very strong market numbers, tens of millions of satisfied users and tech reviews that are superb, the pop media (for some absurd reason) still insists on abject Apple favoritism. A good example is this piece from ZDNet: With Apple's U.S. dominance, smartphone race heads overseas. The article asserts that Apple's lead in the US is a done deal and any competition will be (fleetingly) found overseas. This assertion totally ignores the fact that Apple has been losing market share for nearly every quarter that Android has sold to the mainstream except for last quarter - a recent quarter whose extreme performance probably cannot be duplicated. It ignores the fact Apple has just half the peneratration of Samsung alone (not Android, just Samsung, its main supplier). It also ignores the fact that Android, despite Apple's stellar quarter, continues to march forward as the mobile OS of choice for the majority - to wit: NPD: Android attracting more than half of new smartphone shoppers:

 

Apple was named the best-selling U.S. handset brand during the fourth quarter, according to a new report from the NPD Group.

 

However, the findings suggest that while iOS has won this battle, Android is really winning the war.

 

Take a look at the graph below:

 

 

Not only do 48 percent of all smartphone buyers own Android smartphones (versus a close 43 percent on iOS), there is a much bigger disparity for first-time smartphone buyers. Android is attracting more than half of them at 57 percent, while Apple is considerably behind at 34 percent.

 

The quality of the OS has mythological lore in the pop media as well, as this article jives with my own personal experience with iOS on my iPad (which I ended up giving away) - iPhone iOS Apps Crash More Than Android: Report. App depth, pricing, dversity in offerings and superior tech have led to Samsung, Android continuing its U.S. lead through December, despite the blowout quarter from Apple...

RESTON, VA, February 2, 2012 – comScore, Inc. (NASDAQ: SCOR), a leader in measuring the digital world, today released data from the comScore MobiLens service, reporting key trends in the U.S. mobile phone industry during the three month average period ending December 2011. The study surveyed more than 30,000 U.S. mobile subscribers and found Samsung to be the top handset manufacturer overall with 25.3 percent market share. Google Android strengthened its lead in the smartphone market to reach 47.3 percent market share. Covering the three-month period ending December 31, Samsung remained constant without any changes in its portion of the market share — likely because the anticipated Galaxy Nexus did not make a debut on shelves until nearly the end of the quarter.

The only mobile OEM to post an increase was Apple, which ranked fourth with 12.4 percent of the market share and a 2.2 percent point change. 

Putting this in perspective allows one to see just how far Android has shot ahead in such a short amount of time. Last quarter was Apple's biggest quarter ever for a variety of reasons that are the result of the confluence of a swath of unrepeatable factors. Despite such an outrageous quarter that likely will never be repeated, Apple still has less than than half the market share of Samsung, its largest vendor (we aren't talking Google's Android here, we're talking Apple's own [other] vendor, Samsung). This is relevant for a variety of reasons. For one Samsung's tech is vastly superior to that of Apple's. Marketing and fanboisms aside, practically any objective review agrees with this assertions. We did a head to head comparison of the iPhone 4GS and the Samsung Galaxy 2S during the last BoomBustBlog meet and greet. For those who weren't there, simple peruse YouTube for the many professional comparisons to be found. 

You see, the cool thing about YouTube is that you can interact with the TV audience. There are nearly a million views of their comparison with nearly 3,300 likes/dislikes and 5,000 comments. I invite one and all to go through them cursorily to determine what the actual populace (not the slanted media or Apple's marketing department) feels about the phones, and more importantly, what their next phone will be. 

As for Android, there’s no stopping it anytime soon. The platform now covers 47.3 percent of the U.S. mobile market share. Again, in the top five only Apple saw a surge in its cut as iOS placed second with 29.6 percent.

OEM Market Share

For the three-month average period ending in December, 234 million Americans age 13 and older used mobile devices. Device manufacturer Samsung ranked as the top OEM with 25.3 percent of U.S. mobile subscribers, followed by LG with 20 percent share and Motorola with 13.3 percent share. Apple continued to gain ground in the OEM market with 12.4 percent share of total mobile subscribers (up 2.2 percentage points), while RIM rounded out the top five with 6.7 percent share.

Top Mobile OEMs
3 Month Avg. Ending Dec. 2011 vs. 3 Month Avg. Ending Sep. 2011
Total U.S. Mobile Subscribers (Smartphone & Non-Smartphone) Ages 13+
Source: comScore MobiLens
  Share (%) of Mobile Subscribers
Sep-11 Dec-11 Point Change
Total Mobile Subscribers 100.0% 100.0% N/A
Samsung 25.3% 25.3% 0.0
LG 20.6% 20.0% -0.6
Motorola 13.8% 13.3% -0.5
Apple 10.2% 12.4% 2.2
RIM 7.1% 6.7% -0.4

Smartphone Platform Market Share

97.9 million people in the U.S. owned smartphones during the three months ending in December, representing 40 percent of all mobile subscribers. Google Android ranked as the top smartphone platform with 47.3 percent market share, up 2.5 percentage points from September. Apple maintained its #2 position, growing 2.2 percentage points to 29.6 percent of the smartphone market. RIM ranked third with 16 percent share, followed by Microsoft (4.7 percent) and Symbian (1.4 percent).

Top Smartphone Platforms
3 Month Avg. Ending Dec. 2011 vs. 3 Month Avg. Ending Sep. 2011
Total U.S. Smartphone Subscribers Ages 13+
Source: comScore MobiLens
  Share (%) of Smartphone Subscribers
Sep-11 Dec-11 Point Change
Total Smartphone Subscribers 100.0% 100.0% N/A
Google 44.8% 47.3% 2.5
Apple 27.4% 29.6% 2.2
RIM 18.9% 16.0% -2.9
Microsoft 5.6% 4.7% -0.9
Symbian 1.8% 1.4% -0.4

Mobile Content Usage

In December, 74.3 percent of U.S. mobile subscribers used text messaging on their mobile device, up 3.2 percentage points. Downloaded applications were used by 47.6 percent of subscribers (up 5.1 percentage points), while browsers were used by 47.5 percent (up 4.6 percentage points). Accessing of social networking sites or blogs increased 3.8 percentage points to 35.3 percent of mobile subscribers. Game-playing was done by 31.4 percent of the mobile audience (up 2.6 percentage points), while 23.8 percent listened to music on their phones (up 2.9 percentage points).

Mobile Content Usage
3 Month Avg. Ending Dec. 2011 vs. 3 Month Avg. Ending Sep. 2011
Total U.S. Mobile Subscribers (Smartphone & Non-Smartphone) Ages 13+
Source: comScore MobiLens
  Share (%) of Mobile Subscribers
Sep-11 Dec-11 Point Change
Total Mobile Subscribers 100.0% 100.0% N/A
Sent text message to another phone 71.1% 74.3% 3.2
Used downloaded apps 42.5% 47.6% 5.1
Used browser 42.9% 47.5% 4.6
Accessed social networking site or blog 31.5% 35.3% 3.8
Played Games 28.8% 31.4% 2.6
Listened to music on mobile phone 20.9% 23.8% 2.9

For those of you who claim that Android can have majority market share as long as Apple enjoys the marjority of the profits, I fear you may not understand how Apple garnered those above market profits in the first place. Keep in mind the power of the "network effect"  which exponentially increases the value of a service or product as more people use it, often creating universal standards where there were none. Apple created a defacto standard through its ecosystem, thus used the network effect to boost margins. Google is attempting to do the same, and if it succeeds, will eat heavily into Apple's margins as the network effect will no longer serve Apple, but its new master (until dethroned), Google. This is why Google's onslaught must be stopped by any means necessary - hence the legal assault team at Apple.

Click here for a full explanation of how the network effect works in the smartphone industry.

The second factor is that Apple's biggest advantage over its competitors is its "Cool" factor. That is, Apple is simply better at marketing than its competition - all of its competition. Of course, this begs the question "How long will it take for said competition to get a clue?" Well, this may answer that question.

Samsung moving up on Nokia as Apple passes LG for 3rd place in global phone share

Samsung cut Nokia's worldwide lead from 10% to just 4% in 2011 and Apple passed up LG. 2012 will likely see continued rise of Samsung and Apple in the global phone market. 

Samsung closed the gap with Nokia from 10% to just 4% though and we may soon see them take the lead. Apple moved up, actually doubled their market share in a year, and passed up LG in 2011.

Apple's smartphone business now generates more revenue than all of MSFT's software businesses, compbined. Taking note of this, it is impossible not to consider Apple a smart phone/tablet company. Apple's primary profit machine sales were off the charts. Apple is, from a revenue and profit perspective, essentially a smartphone company (subscribers reference File Icon Apple – Competition and Cost Structure)

So, what happens when your primary product, revenue and earnings driver is banned from being sold? Crash???!!! 

Motorola wins iCloud injunction; iPhone, iPad temporarily pulled from online store

This is a big deal. You see, while this ruling was temporarily suspended (ex. more litigation) it displays the power the world' largest and deepest mobile phone patent portfolio holder wields under the guidance of Google. This combined with Apple fighting its largest vendors cannot be considered a good, nor safe bet for the company. If you shut down, or significantly hamper Apple's smartphone sales, you practically shut down or significantly hamper the company itself. After all, it esentially a smart phone company.

Now A Question To Get The FanBois Riled Up

Which CEO had the greatest effect on the world to date, Steve Jobs or Bill Gates? I welcome all opinions and answers, just stay polite and professional.

Remember, I never said Apple will go out of business, I said they will have to spend more to remain competitive against Google's less than free business model, see Looking at the Results of Google's "Negative Cost" Business Model Employed Through Android.

Cook has even said himself that one shouldn't expect the margins Apple exhibited last quarter again, and the reason he said it wasn't because he was reading BoomBustBlog that morning -  or Sliced Apple Margins For Dinner? or Steve Jobs Calls End Of the PC, We Call The End Of The Fat Margin Tablet – Including The Pretty iPad, With Proof! 

Other links of interest...

 
Last modified on Tuesday, 07 February 2012 19:04

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